Warnings come on risky investments

It’s a testing time for investors. Global equity markets appear to be propelling higher, but the dire warnings from the world’s bond gurus are raining down thick and fast.

Overnight, Jeff Gundlach, chief executive of the high-performing DoubleLine Capital, which has more than $US37 billion in assets under management, became the latest investment manager to warn investors to avoid risky investments in 2013.

In an interview on Bloomberg television, Gundlach argued that market fundamentals were beginning to reassert themselves more strongly, despite massive money-printing by global central banks. “Investors should be holding cash to buy risk assets at lower prices once the fundamentals assert themselves", he argued.

“We are likely to see substantially lower prices in many of the assets that have been propped up – like the S&P – by quantitative easing….. Ultimately these things will find their level."

Gundlach warned that the US faced the risk of recession as it tried to fix its budgetary problems. The next recession, he warned, would be a “real killer" because the US will find itself short of policy responses.

It would be, he said, “policies in terms of raising taxes and cutting spending that helped to bring on the next recession…So I don’t think it’s very plausible you’re just going to turn around and go back to the old method of pumping up the economy with debt [when] the next recession comes. The next recession probably is going to be somewhat cleansing which means that you’re going to see things reprice lower.’

Meanwhile, Bill Gross, the co-founder of the giant US bond fund PIMCO which has $US1.9 trillion in assets under management, warned investors not to under-estimate the dangers of investing in corporate bonds.

“While spreads are not as narrow and prices as high as five years ago, hundreds of billions of investment dollars are pouring into corporate bonds on the assumption that credit spreads are the least overpriced asset in a world of near-zero sovereign interest rates", he wrote in an editorial published in the Financial Times.

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According to Gross, as ratings agencies have downgraded triple-A countries such as the United States and France, investors have begun to speculate that multinational companies are better credit risks that top-rated countries. The rush into corporate bonds accelerated in 2012, as prices for investment-grade and high-yield corporate bonds rose compared to those of US, UK and German bonds.

But, he warned, risk markets were being held up by the quantitative easing policies being pursued by global central banks. “Whenever equity prices go down or credit spreads widen, central banks inject tens of billions of additional reserves. In effect, the Bernanke, King, or potentially Draghi “put" serves to elevate asset prices and preserve the semblance of a “can’t lose", low risk character to many risk markets."

Gross argued that there was a risk in the highly leveraged nature of the financial system. The US central bank’s monetary base is around $4 trillion, but this is supporting $54 trillion of government, corporate and household credit. Similar levels of leverage exist in the United Kingdom and the euro zone.

The latest round of warnings come after veteran investor, Ray Dalio, who founded Bridgewater Associates manages $120 billion in assets, last week cautioned investors that the massive US bond rally was running out of steam, and that US interest rates could start rising “late next year".

According to Dalio, the US central bank’s policy of pushing interest rates extremely low has seen the price of risk assets soar. But that was all about to change. Rising interest rates, he warned, would “reverberate through all asset classes."